Question

Luzadis Company makes furniture using the latest automated technology. The company uses a job-order costing system and applies manufacturing overhead cost to products on the basis of machine-hours. The predetermined overhead rate was based on a cost formula that estimates $765,000 of total manufacturing overhead for an estimated activity level of 85,000 machine-hours. During the year, a large quantity of furniture on the market resulted in cutting back production and a buildup of furniture in the company’s warehouse. The company’s cost records revealed the following actual cost and operating data for the year:

Machine-hours 69,000

Manufacturing overhead cost $ 719,000

Inventories at year-end:

Raw materials $ 14,000

Work in process (includes overhead applied of $62,100) $ 183,000

Finished goods (includes overhead applied of $105,570) $ 311,100

Cost of goods sold (includes overhead applied of $453,330) $ 1,335,900

Required:

1. Compute the underapplied or overapplied overhead.

2. Assume that the company closes any underapplied or overapplied overhead to Cost of Goods Sold. Prepare the appropriate journal entry.

3. Assume that the company allocates any underapplied or overapplied overhead proportionally to Work in Process, Finished Goods, and Cost of Goods Sold. Prepare the appropriate journal entry.

4. How much higher or lower will net operating income be if the underapplied or overapplied overhead is allocated to Work in Process, Finished Goods, and Cost of Goods Sold rather than being closed to Cost of Goods Sold?

Answer 1

& Luzadis company makes furniture (17 predetermined overhead Rate - Estimated to tell monufoH. Estimated machine Hours = $ 765000 85000 machine Hour $ 9 pes machine Hour S +19 ODO Actual manuf overhead cost manuf overhead Applied Actual machine hour 69000X $9pes mH Under Applied overhead cost - (621ooo) 98000 Q] Gournal entry: Date Account Name cost of Good sold cond TO manufacturing overhead (TO close under applied overhead) Debit caedit $ 98000 $ 98000 (2) 3 work in process $ 62100 Finished Goods 105, 570 cost of Good sold 453,330 Total Is 621000 10% ($62100: 621000] 17% ICs 105,570 621000] 731 C453 330 621000) 100%

- Journal entry Debit Account Nome work In Process & 98000 x 100% Finished Goods Cinished ( 98000 x 17% cost of Goog sold cs 98000 737 To manufacturing overhead $ 9800 16,660 71540 3. $ 98000 1971 cost of Good sold when Applied to WIP, F.GHE COGISCE 1335900 + 98000) $ 1433 900 leost of Good sold when applied to only. coas ( 13 35900 + 7154 0 ] $ 1,907, 440 Difference $ 26460 It is applied to wIP, F G & cost of Good sold than net income would be highes by $26460 than being closed to coors